Compensation as A Source of Competitive Advantage

Christina L. Greathouse, Ph.D.Strategic Performance Group

October 15, 2013

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Strategic Performance Group• Founded 1995• Three partners, 32 contract employees• Work across all industries• Human Capital Solutions, OD, Coaching• Christina Greathouse Bio

25+ years consulting experience with Arthur Andersen and KPMG Peat Marwick prior to co-founding SPG

Ph.D. Industrial/Organizational Psychology Taught graduate level courses at GMU and Marymount

University

Strategic Performance Group• The Great Recession has radically

changed the way many companies do business

• Dramatic shifts in corporate strategy requiring re-alignment of compensation practices to support those changes

• Newly conservative approach to compensation spending

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Today’s Topics• What science has taught us about work

motivation• The relationship between pay satisfaction and

job satisfaction• Why “pay for performance” systems often fail• How compensation can be used effectively as

a management tool to gain and keep a competitive advantage

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Compensation Redesigned• The Great Recession has radically

changed the way many companies do business

• Dramatic shifts in corporate strategy requiring re-alignment of compensation practices to support those changes

• Newly conservative approach to compensation spending

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Compensation as a % of GDP

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Compensation and Productivity

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Global Salary-Budget Trends

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Source: WorldatWork 2013-2014 Salary Budget Report

2012-2014

Actual 2012 Actual 2013 Projected 2014

India 11.2% 10.5% 10.9%China 9.1% 8.2% 8.5%Brazil 7.7% 6.8% 7.2%Singapore 4.3% 4.2% 4.3%Australia 4.0% 3.7% 3.8%UK 3.1% 2.9% 3.0%Netherlands 3.1% 2.8% 2.8%Canada 3.0% 2.9% 3.1%France 3.0% 2.7% 2.8%Germany 3.0% 2.9% 3.0%United States 2.8% 2.9% 3.1%Spain 2.8% 2.4% 2.5%Japan 2.6% 2.4% 2.5%

Pay Dissatisfaction• Washington Post (9/29/13) reported: “Four years into an

economic recovery in which most of the benefits have flowed to the top earners, a majority believe that the American Dream is becoming markedly more elusive (source: Washington Post-Miller Center Poll)

• 58% of those polled believe they earn less than they deserve

• 6 in 10 workers worry these will lose their jobs because of the economy

• SPG employee survey research indicates that many employees are dissatisfied with their compensation

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Employee Surveys: Low Scoring Items

• I receive reasonable compensation compared to my peers at my company.

• The pay at my company is competitive with other similar organizations.

• I am paid fairly for someone with my qualifications. • I am paid fairly for my accomplishments at my company.• I receive reasonable compensation compared to my peers at my

company.• People are compensated at my company for what they accomplish.• My hard work is rewarded appropriately.• I have been adequately recognized for my work contributions. • I understand how the current compensation system works.• I understand how performance increases are awarded.

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Relationship of Pay Satisfaction to Job Satisfaction

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Items Correlating with, “Overall, I like my job” CorrelationI have the opportunity to gain skills and knowledge necessary to perform my job.

0.70

There is adequate opportunity for growth and career development for me at my company.

0.69

I feel my company values my work. 0.66

At my company, our culture builds a feeling of teamwork and collaboration. 0.64

The amount of stress in my job is not a problem. 0.61

I receive adequate training on an ongoing basis. 0.60

I usually have a clear idea of what my supervisor expects of me. 0.59

My hard work is rewarded appropriately. 0.59

I have been adequately recognized for my work contributions. 0.50

The pay at my company is competitive with other similar organizations. 0.32

I am paid fairly for what I accomplish at my company. 0.37

Work Motivation Theories

• Expectancy Theory (Vroom)• Equity Theory (Adams)• Motivator-Hygiene Theory (Herzberg)• Self-Determination Theory (Deci)

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Expectancy Theory (Vroom)

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Motivator-Hygiene Theory (Herzberg)

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Equity Theory

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Equity Theory (Adams)

• There is an expectation to be paid according to one’s contribution

• Research has shown that most people– Perceive themselves as top performers when

compared with others– Believe they work as hard or harder than others– Attribute their success to hard work and/or skills– Attribute others’ success to luck or favorable conditions

• This leads to feelings of inequity and unfairness when comparing one’s compensation with others’ compensation

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Goal-Setting Theory

• Clarity: Specific, measurable, time-bound• Challenge and Complexity: Enhances

feelings of achievement• Commitment: Input and ownership• Feedback: Assessing progress

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Self-Determination Theory (Deci)

• People have three innate, psychological needs:• Competence: succeeding at challenging tasks

• Autonomy: having choice over one’s actions

• Relatedness: enjoying mutual respect and reliance with others

• Meeting these needs leads to job satisfaction, work motivation, and high performance

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Putting It All Together• Employees can be de-motivated by receiving less pay than

they think they deserve (equity theory)• There are very few jobs where “paying for performance” is

motivating because the rewards are too small (expectancy theory)

• Compensation can lead to job dissatisfaction, but has a limited effect on job satisfaction (motivator-hygiene theory)

• Employers need to get employees to stop obsessing over compensation, so they are open to other powerful motivators such as a desire to do meaningful work, intellectual challenge, recognition, and self-determination (self-determination theory)

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Achieving a Competitive Advantage

Adopt pay practices that avoid de-motivation:• Implement a transparent compensation philosophy and process

in line with organization’s values• Pay people fairly in relation to the market and to each other

(internal and external equity)• Stop using salary increases and bonuses as an incentive,

unless they are large enough to make a difference• Reward results, not effort• Use pay as a recognition tool• Use goal setting to motivate performance, not as a method to

determine compensation

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Establishing Equity

• Internal equity: job classification• External equity: market analysis• Integrate equity analyses into pay

decisions• Establish fair pay administration

processes

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Differentiation Among Talent Segments • Must be willing to pay a premium to attract and retain

highly skilled talent critical to the successful execution of the business strategy

• Identify talent segments critical to success• Identify key drivers for each talent segment• Identify talents segments at risk• Design strategies employing a full range of rewards for

critical talent segments• Integrate these strategies into corporate compensation

program

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ProductionR&DQualityITMarketingAccountingHR

Unique skills

High strategic value

Lower

strategic value

Generic skills

Core knowledge workers

Traditional job-based employees

Alliance/ Partners

Contract labor

Mapping an Organization’s Human Capital Architecture

Employee Functions

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Pay Increases as a Function of Performance

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Mercer U.S. Percent of Workforce* Average Pay Increase*

Highest-rated 7% 4.6%

Next highest-rated 30% 3.5%

Middle-rated 54% 2.6%

Low-rated 7% 0.9%

Lowest-rated 2% 0.2

Source: Mercer 2013/2014 U.S. Compensation Planning Survey Report

Holistic Compensation Strategies

• Use compensation programs strategically, to support the business strategy

• Integrate the compensation system with other components of the HR life-cycle

• Employ a full-range of strategies to recognize and reward employees

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Holistic Compensation Strategies

• Base salary• Short-term rewards• Long-term rewards• Equity-based rewards• Employee benefits• Non-financial recognition and rewards

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Recognition and Rewards• Spot bonuses• Project completion bonuses• Retention bonuses• Investment in training and development• Paid time off• Flexible work schedules• Cross-training

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Transparency and Communication • Employee input/buy-in• Providing market pricing data• Publishing internal salary ranges• Publishing total compensation

statements• Publishing compensation and benefits

information on website

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Total Compensation StatementsBenefit Employer Cost Employee CostMedical Insurance or Stipend

$4,565 $910

Disability/Life $1,245 ___

401(k) Match or Pension

$8,194 ___

Salary/Bonus $65,654

TOTAL COMP $79,658

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